Investors worried about greater volatility in markets and escalating geopolitical tensions might want to consider adding some gold to their portfolios, according to wealth manager Cazenove Capital’s Janet Mui.
Last year saw the precious metal perform strongly against a backdrop of policy and geopolitical uncertainty, as investors sought safety from any potential downturn or increased volatility.
However, despite its relatively high valuation, global economist Mui said that the yellow metal was the favourite option for hedging against outbreaks of geopolitical tension that could hurt the market.
Gold, she said, could provide the necessary diversification and protection should the investment backdrop change and is something investors should consider adding to their portfolios now.
Performance of Bloomberg Gold Spot index in 2019
Source: FE Analytics
Gold has typically been deemed a ‘safe haven’ asset by investors as being a physical commodity it acts as a store of value. That along with its scarcity means that unlike cash it will maintain that same value over time, making it ideal as an inflation-protected asset.
And although inflation has been low and looks likely to remain low, said Mui, it has other defensive capabilities for when markets become more turbulent, as was seen at the start of the year.
The escalation of tensions between the US and Iran following the assassination of Iranian general Qassem Suleimani saw a spike in oil prices.
What many failed to miss, said the Cazenove economist, was the gold price reaction: while it too spiked, it stabilised much faster than oil.
“Gold prices have reached over $1,600 [per ounce],” Mui said, “but it has fallen back a little bit, so it really suggests that gold has the feature of portfolio hedging and diversification when there are times of geopolitical tension.”
Gold versus oil price since 2015
But even at higher prices, Mui said investors should allocate to gold if they haven’t already.
“Although the price had risen we think that, structurally, interest rates will remain low, gold usually performs well in those environments,” she explained.
“We think that the global central banks will remain accommodative in the foreseeable future so you’re going to see QE [quantitative easing] continue and have liquidity in the market. So, gold should perform well in these markets.
“And the fact that other diversifying assets such as government bonds are very expensive and we don’t see value in the long term.
“We still believe that gold has good properties for portfolio hedging purposes and we still believe it’s worth holding onto gold.
Looking ahead to the rest of decade, Mui (pictured) identified three structural themes that the wealth manager is keeping an eye on as areas of potential risk. 
The first area concerns the “economic forces” at work and largely the ageing populations in many major economies that Mui believes will result in “structurally lower interest rates and structurally lower growth and inflation”.
The second area Cazenove is watching is “disruption”, which is being seen in trends such as ‘big data’, climate change and the rise of automation.
“These can be perceived as threats to the general labour force as in some jobs will be lost,” Mui said. “But there will be opportunities in the investment horizon such as selective technology companies.”
And the final consideration for Cazenove is geopolitics, which Mui said will “remain elevated” in this age.
“We saw the phase one signing of the US-China trade deal – it’s just the start,” said the economist. “We think that this could persist, [but] definitely not escalate.
“What we’re experiencing now is the fight of two superpowers, the US and China. So, I think this kind of geopolitical tension will persist and will remain elevated.”
Mui said this tension will be a characteristic of the market for years to come regardless of who wins the upcoming presidential election.
Whilst she admitted that US president Donald Trump is more “erratic in terms of his communication and his decision making”, the rise of China is unstoppable.
“I think that it’s generally perceived by the world and the general population that China is rising to be a very significant competitor and in fact it can surpass the US in terms of GDP,” she explained.
“We know that China is going to surpass the US in terms of GDP but in terms of technology that is something which the US is very concerned about.
“And no matter which president is in place, I think that they’re going to have a tougher stance on China compared to previously.”